Beware the Pitfalls of Long-term Car Loans

The Canadian automotive industry has warned buyers to carefully consider the ramifications of taking out an increasingly popular longer-term car loan.Long-term loans of 72 months have ballooned in Canada from just 14% of all car loans in 2007 to more than half - or 58% - today.At the same time, the amount Canadian car buyers borrowed swelled from just $0.35 in the dollar in 2007 to $0.92 in the dollar today.Given a depreciation rate of 10-15% per year, a vehicle can find itself in “negative equity” in as little as seven years. In other words, the car’s value reaches zero, but debts remain on its purchase. Car buyers then have no or little funds to transfer to the purchase of their next car.The trend to long-term loans has not been limited to Canada. In fact, it’s increasing, with loans of 96 months growing in several markets. The rationale behind long-term loans is to amortise the car’s cost over a longer period, making for lower monthly repayments.

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